OPINION

Populism - The Morbid Symptom of a Political Crisis

By Franz Baumann*

NEW YORK (IDN) - Carnage in Syria, millions (dozens of millions actually) of forcibly displaced people, fast-tracking global warming, crises in South Sudan, Venezuela, Brazil, Turkey, the Philippines and elsewhere, terrorist attacks in Europe, the UK Brexit vote and the US presidential election. What a list! Was 2016 an unusually ghastly year, or was it rather the new normal?

Hoping against hope that it was an outlier, these reflections highlight several macro trends that feed chauvinistic outbursts in many countries, yet that will not likely be reversed by anti-globalism, protectionism or militarism: rising inequality, jobless growth, terrorist attacks, the influx of migrants, corruption.

The feeling that representative democracy has broken down and that politicians are self-serving or even corrupt has resulted in voters’ alienation from traditional parties that seem unable or unwilling to get things done. With their simplistic yet forceful message, populists tap into the social, economic and political discontent of people who are worried about the future and would rather turn back the clock.

Pulling up the drawbridge and romanticising a wholesome national past are defensive reflexes in light of an uncontrollable or hostile outside world. But are nationalistic answers serious responses to complex global problems? Can protectionism in the United States generate broad-based prosperity and revive inner cities whose retail businesses have been vaporized by on-line shopping? Can it bring back well-paying jobs that have been lost to digitization and automation? Can it narrow the gaps in income and wealth that make the early 21st century resemble more the late 19th than the middle of the 20th?

It cannot, because protectionism is an unsuitable remedy for disruptions caused by technological advances and unmanaged market forces that mainly benefit elites. Globalization and immigration have become straw men for the technology-induced dislocations of jobless growth, unmanaged economic actors and social polarization. Anti-Globalization cannot, and immigration phobia should not, be the answer. Instead, fact-based, value-oriented, cooperatively managed globalization, and competent, decent, rule-bound and well-functioning states hold the key to a livable future.

Political trends are strongly shifting towards nationalism and against globalization, in some countries more for economic reasons, in others on account of immigration. Everywhere, though, they reflect alienation. Javier Solana notes that voters, “driven by a sense of injustice and inequality, are increasingly rejecting openness as well as the political establishment that has achieved it.”[1] Centrist parties are losing credibility vis-à-vis large segments of their countries’ populations, thus creating openings for charlatanic populists. Since these populists, however, will also not be able to deliver on their promises, the erosion of rule-of-law principles, the degradation of functioning institutions, indeed of the norm-based global system, are plausible risks. The surge of chauvinistic populism in parts of Europe, Brexit and the victory of “America First” are symptoms of an upheaval. What are the proximate causes?

In the past quarter century or so, the world economy grew threefold,[2] life expectancy rose from 65 to 72 years,[3] child mortality was halved,[4] as was absolute poverty,[5] and the economic inequality between countries declined, not marginally but significantly.[6] While these trends represent a remarkable success story, they are of little interest to those in Western countries who feel that the cards are stacked against them and whose point of reference is neither the world nor the global South but their own country. It is inequality, not poverty, that propels populism. During the past decades, inequality in Western countries shot up because deregulation as well as growth in productivity and trade did not translate into corresponding higher living standards for all. Just for some.

In the United States, for instance, inequality has deepened considerably. Tax policies - the preferential tax treatment for the wealthy and ultra-low corporate taxes in various jurisdictions - have contributed to this. Government transfer payments have not much ameliorated it. The result is “a tale of two countries. For the 117 million U.S. adults in the bottom half of the income distribution, growth has been non-existent for a generation while at the top of the ladder it has been extraordinarily strong;” it all but doubled for the richest one per cent.[7]

Since the 1980s, the wealthiest have benefitted disproportionately while those in the middle and particularly those near the bottom were left behind. A major shift towards outsourcing - independent contractors, on-call workers and labourers provided by temp agencies has - has depressed wage income. In the US, such fragile work accounts for 94 per cent of employment growth over the past decade, from 15 million ten years ago to 24 million jobs today.[8]

The promise of the liberal international order, well captured in the Davos motto “committed to improving the state of the world,” does not resonate with many whose lives have stagnated. The phenomenally lopsided distribution of income and wealth - Oxfam notes that a handful of people own as much as half the world, 3.6 billion people.[9] While some methodological questions have been raised, the accuracy of the stark picture is undisputed.

The key driver that keeps wages down and eliminates jobs is the technology-induced productivity blast, welcome though it is in itself. Productivity in most developed countries has grown faster in the past decades than wages, and has led to a 20 per cent decline of the labour share of income from 75 per cent to 65 per cent.[10] And within the smaller share that goes to labour, inequality has surged. Disproportionate benefits have accrued to high earners. Technological innovation is the main cause of the widening income discrepancies and for jobless growth, indeed for the spectre of “full unemployment.”[11] The co-founder of a start-up dedicated to the automation of gourmet hamburger production confirms that his machinery is not “meant to make employees more efficient. It’s meant to completely obviate them.”[12]

People grasp that this runaway train will leave them behind, unless something is done. Apple employs about 100,000 people and is valued at around $600 billion, thus nearly half the gross domestic product of Russia ($1,331 billion), twice that of Denmark ($333 billion), considerably more than that of Belgium ($455 billion) or Austria ($377 billion), and a bit less than that of Switzerland ($671 billion). Facebook, worth over $230 billion, employs about 13,000 people. In 2014, it bought Whatsapp (55 employees!) for nineteen billion dollars.[13] When such a “company can fit its entire workforce into a Greyhound bus, the concept of surplus labour would seem to have run its course.”[14]

US industrial output has doubled since 1983, but with half the workers: 12 million, down from 23 million.[15] The US coal industry similarly shed half its workforce. In 1980, it still employed some 240,000 people. In 2015, even though output had increased, only 99,000 workers remained, because productivity had soared stunningly over 300 per cent from less than two short tons per miner hour in 1980 to more than six short tons per miner hour in 2015.[16] Since 2014 the oil industry lost 10 per cent of its workforce, while output rose by 10 per cent.[17]

It used to be the purpose of automation to leverage human capacity. Increasingly, automation and artificial intelligence are doing away with humans altogether. People sense that they cannot compete against machines. And they feel abandoned by a political system seemingly rigged against them, as self-serving and corrupt. It might seem paradoxical that this anti-establishment rage propelled into the US presidency a multi-billionaire who has declared bankruptcy several times, who refuses to reveal his tax returns and who boasts that not paying taxes is a sign of cleverness. To his alienated voters, “Trump’s apparent willingness to blow up the system matters far more than the possibility that he might feather his nest along the way. When a focus group of Trump voters with whom CNN meets regularly was asked about his potential conflicts of interest, their response was ‘Who cares?’”[18]

Yet corruption is a big problem and an indication of a system spinning out of control. The economic dynamics have gone into overdrive. More than ever, shareholder values and bonus payments have become key motivators of economic activity. Employees are merely cost factors; laws are irritating speed bumps to be dodged. Huge fines are paid cavalierly, and it appears that being caught is the problem, not the transgression. The mind boggles at the nature and number of corruption scandals that have come to light in the recent past. Courts have imposed multi-billion penalties on several companies for egregious criminal offences, and quite a few senior politicians around the world are being investigated for corruption.

In late August 2016, the European Competition Commissioner Margarethe Vestager instructed the government of the Republic of Ireland to recover up to €13 billion ($14.5 billion) plus interest in unpaid taxes from Apple. The Commission had concluded that Apple, although not having broken any laws, had benefitted from rulings by the Irish government that artificially lowered its taxes. The Commission argued that a dubious profit-allocation deal allowed most of Apple’s profits to be moved to a “head office” that was tax-resident in no country and had neither staff nor premises, thus allowing Apple to pay an effective tax rate of about 0.005% on its overall annual profits, that is €50 for every €1,000,000 of profit.[19]

The European Commission’s campaign against aggressive tax avoidance began after the 2008 crisis necessitated austerity and forced a push for greater tax fairness. The Commission reviewed dubious configurations established by US companies, in addition to Apple for example Starbucks and McDonald’s, that allow corporations to pay minimal taxes in the European Union for profits realized there, while at the same time benefitting from deferral provisions in the US tax code to keep profits offshore and, thus, to shield them from tax payments in America, where they would be taxed at a hefty 35% (minus any payments made in Europe) if repatriated.

These companies are panicking as they fear that “Europe will lay claim to some of the more than $2 trillion of profits that American firms have amassed offshore, under the deferral provisions.”[20] The tax evasion ploys are elaborate yet not illegal. Google, for instance, reported $13 billion in profit in Bermuda in 2014, where there is no corporate income tax, as the result of convoluted manoeuvres, thus saving $3.1 billion since 2007. Jesse Drucker, a reporter for Bloomberg News, tracked Google’s foreign profits from Ireland via Google Netherlands Holdings to Bermuda, a “ruse that is known as the “Double Irish” and the “Dutch Sandwich.”[21]

On March 1, 2017, US federal agents raided the Illinois headquarters of the equipment manufacturer Caterpillar, accused of using sham transactions to transfer $8 billion in profits to a Swiss subsidiary from 1999 to 2012. Senator Carl M. Levin, Democrat of Michigan, claimed that the transfers were not legitimate business transactions, but were made solely to take advantage of a lower tax rate Caterpillar had negotiated with Switzerland: Instead of paying the required corporate tax rate of 29 percent, only 4 to 6 per cent were due in Switzerland owing to negotiated ad hoc arrangements.[22]

In April 2016, newspapers around the world published articles on the Panama Papers, shorthand for the largest leak in journalism history: 11.5 million secret files of the Panamanian law firm Mossack Fonseca’s 14,153 private clients and 214,000 companies. To serve these, Mossack Fonseca had set up a nefarious global scheme to launder money or to avoid taxes. One year earlier, in the spring of 2015, a Mossack Fonseca insider approached Bastian Obermayer, an investigative reporter for the German newspaper Süddeutsche Zeitung.

Given the volume, complexity and sensitivity of the material, Obermayer and his colleague Frederik Obermaier reached out to the International Consortium of Investigative Journalists, a non-profit organization founded in 1997 to pursue “watchdog journalism, focusing on issues that do not stop at national frontiers: cross-border crime, corruption, and the accountability of power” (https://www.icij.org/about).

For more than a year, some 400 journalists from more than 100 media organizations in over 80 countries researched the documents, revealing in sickening detail how the “wealth management industry” finances crime, war, drug dealing, and fraud on a grand scale as well as how the world’s rich and powerful hide their wealth to avoid paying taxes.

The documents include a dozen current and former heads of state, nearly 200 politicians, several government ministers and countless family members, friends and associates.[23] “A sorry parade of arms smugglers, oligarchs, defense contractors, mafia dons, drug dealers, gambling fraudsters, sanctions breakers, and kleptocrats emerge from the papers. … the richest man in Syria, a Uruguayan presidential candidate, three current prime ministers, a well-known film director, a former Iraqi vice-president, a top soccer player, a clutch of Arab heads of state, the brother-in-law of the Chinese president. We get glimpses into billions siphoned out of Africa, China, Libya, and Russia.”[24]

According to Gabriel Zucman, a professor at the University of California, Berkeley, and the author of The Hidden Wealth of Nations, about 8 per cent of the world’s wealth - $7.6 trillion - is held in tax havens.[25] Lost tax revenue is one effect of this hidden system; more dangerous is its damage to democratic rule when corrupt wealthy people, including politicians, have a place to stash assets - many of which stolen - out of public view.

After much prevarication, Volkswagen, the world’s largest car company, admitted in 2015 that during the previous eight years, 11 million diesel vehicles had been equipped with illegal software to defeat pollution tests. The software recognized when cars were being tested and, then, switched on pollution-controls. To improve performance under normal road conditions, the cars spewed nitrogen oxide at up to 40 times the levels allowed. In January 2017, Volkswagen pleaded guilty to violations of the Clean Air Act and agreed to pay a $4.3 billion fine. The damage to the company by this large-scale criminal offense will likely rise to tens of billions of dollars.[26]

Since mid-2016, Goldman Sachs, the Wall Street investment firm, is being investigated by the New York State Department of Financial Services for involvement in an international money laundering and embezzlement scheme that earned it close to $600 million. Billions of dollars that Goldman Sachs raised for the Malaysian government investment fund 1Malaysia Development Berhad (1MDB) were channelled into personal bank accounts to buy paintings, luxury real estate and investment stakes. With a fine sense of irony, investments were also made in movies, such as The Wolf of Wall Street. “The 1MDB case has become a signature campaign in the global effort by prosecutors to crack down on kleptocracy and the relative ease with which the superwealthy move their money beyond the oversight of government authorities.”[27]

In September 2016, Wells Fargo, the biggest bank in the US, was fined $185 million for opening over 2 million deposit and credit card accounts without the customers' permission. The Consumer Financial Protection Bureau reported that since 2011 about 5,300 employees were fired for signing customers up for fake accounts.[28] On Friday, 29 January 2017, Senator Elizabeth Warren wrote a letter to acting Labor Secretary Edward Hugler after discovering that the US Department of Labor’s website devoted to whistleblower-related complaints at Wells Fargo had disappeared during the first days of President Trump’s administration. “Taking down this website enables Wells Fargo to escape full responsibility for its fraudulent actions and the department to shirk its outstanding obligations to American workers,” Senator Warren wrote.[29]

In late December 2016, the Brazilian construction company Odebrecht SA and its affiliate, the petrochemical company Braskem SA pleaded guilty in a U.S. federal court in Brooklyn to conspiring to pay bribes in violation of the Foreign Corrupt Practices Act, and agreed on a penalty of at least $3.5 billion. From 2001 to 2016, Odebrecht paid approximately $788 million in bribes in association with 100 projects in twelve countries, including Brazil, Argentina, Colombia, Mexico, Venezuela and Peru.[30] Details are emerging, such as Odebrecht’s admission to having paid $29 million in bribes between 2005 and 2014 to Peruvian officials for public works contracts during the presidencies of Alejandro Toledo (2001-2006), Alan García (2006-2011) and Ollanta Humala (2011-2016).[31] In February 2017, the Peruvian Attorney General Pablo Sánchez formally opened an investigation into Mr. Toledo, who is suspected of accepting $20 million in bribes, over accusations of money laundering and influence peddling.[32]

On 13 January 2017, the Japanese auto parts maker Takata, entered a criminal guilty plea with the US Justice Department and agreed to pay a $1 billion fine. The company’s potentially fatal airbag defects are thought to have caused at least 11 deaths and more than 180 injuries. They also led to the recall - the largest in history - of more than 40 million vehicles in the US alone.[33]

About the same time, in mid-January 2017, Deutsche Bank agreed to the largest amount ever paid by a bank, $3.1 billion in penalties plus $4.1 billion as relief to homeowners, borrowers and communities for its sale of toxic mortgage securities. “Deutsche Bank did not merely mislead investors: It contributed directly to an international financial crisis,” Attorney General Loretta E. Lynch said. The bank admitted that in 2006 and 2007 it had made false and misleading representations to investors about the loans underlying billions of dollars’ worth of mortgage securities.[34]

A week earlier, Deutsche Bank agreed to pay $95 million to resolve a lawsuit of tax fraud for having used insolvent shell companies to hide significant tax liabilities from the United States Internal Revenue Service in 2000. The U.S. attorney for the southern district of New York, Preet Bharara, stated that the “government, through this action and settlement, has made Deutsche Bank admit to its actions designed to avoid taxes.”[35] In late January 2017, Deutsche Bank agreed to pay a $425 million fine in the US as well as £163 million ($204 million) in Great Britain for having helped wealthy Russian citizens launder billions of dollars “by arranging stock trades that had no economic purpose other than disguising what the client was doing.”[36]

Not enough. Also in mid-January 2017, JPMorgan Chase agreed to pay $55 million to settle a U.S. Justice Department lawsuit accusing it of systematically violating between 2006 and 2009 the U.S. Fair Housing Act and the Equal Credit Opportunity Act. Having discriminated against minority borrowers by allowing mortgage brokers to charge them more for home loans, the lawsuit accuses the bank of a “pattern of discrimination [that] has been intentional and wilful, and has been implemented with reckless disregard of the rights of [at least 53,000] African-American and Hispanic borrowers."[37]

At the same time, JP Morgan Chase was ordered to pay $164,000 in damages and compensation for having fired an employee in retaliation for questions the bank’s sales tactics and investment products. In separate proceedings, the bank agreed in 2015 to pay $307 million to settle accusations that it had improperly steered clients to the company’s in-house investment funds.[38]

Also in January 2017, Rolls-Royce, the maker of jet engines and other power systems, agreed to pay $817 million to resolve several long-running bribery and corruption inquiries. The company confirmed that it had entered into a Deferred Prosecution Agreements (DPA) with the UK’s Serious Fraud Office (SFO), the US Department of Justice (DoJ) and a Leniency Agreement with Brazil’s Ministério Público Federal (MPF).

“These agreements relate to bribery and corruption involving intermediaries in a number of overseas markets … from 2012 onwards … and will result in [penalty] payments of £671m [$838 million].”[39] The largest penalty, of £497.3 million ($606 million), will be paid to the British Serious Fraud Office, $169.9 million to the US Department of Justice and $25.6 million to the Brazilian Ministério Público Federal (MPF).

In February 2017, Lee Jae-yong, the acting head of Samsung, South Korea’s most powerful conglomerate was arrested on embezzlement, perjury and bribery charges. It was alleged that he paid more than $36m in bribes to Choi Soon-sil, a longtime friend of the country’s impeached president, Park Geun-hye, in return for business favours, especially the 2015 decision by the National Pension Service (NPS) to approve a controversial $8 billion merger of two Samsung group affiliates.[40]

If the transgressions of companies are stunning in their frequency and scope, those of politicians are like the proverbial canary in the coalmine, indicating that those who should govern the market are often implicated in its failures. At the moment, several senior politicians around the world are under criminal investigation. For instance, the former Argentinian President Cristina Fernández de Kirchner was indicted in December 2016 on corruption charges.[41]

At the same time, prosecutors again - the first time was three months earlier - charged former Brazilian President Luiz Inácio Lula da Silva, his wife and a former finance minister with corruption in the investigation of graft at state-run oil company Petrobras.[42] Also in December 2016, the South Korean President Park Geun-hye was impeached by Parliament, inter alia for taking bribes from businesses and sharing classified documents with her confidante, Choi Soon-sil, who, in turn, has been charged with using her influence over Park to wrest almost $70 million from some of South Korea’s biggest companies, including LG, Hyundai and Samsung.[43]

In January 2017, the Israeli Prime Minister Benjamin Netanyahu was investigated for corruption.[44] The French conservative presidential candidate François Fillon is being investigated for having employed his wife and children for no-show jobs as his parliamentary assistants, for which they were paid €800,000 (or more) of public funds.[45] The corruption allegations against the South African President Jacob Zuma are legendary.[46]

On the one hand, the above almanac of abuse and corruption illustrates the widespread skirting of regulations to boost profits and personal bonuses, i.e. the frantic, perhaps even systemic pursuit of economic success and private gain at any cost. It brings into sharp relief the fading of norms, the weakening of moral constraints and the ruthless circumvention of laws. On the other hand, it also shows the resilience of legal institutions and the importance of professional, independent and investigative journalism. The preservation of both will be supremely important in this unsettled age of populist rage, which is fed by the interplay of inequality and corruption. “When traditional politicians fail to tackle corruption, people grow cynical. Increasingly, people are turning to populist leaders who promise to break the cycle of corruption and privilege.”[47] What happens if the populists, as is likely, will not redeem the hopes placed in them?

A runaway digitized and globalized economic system has produced winners in terms of income, opportunity and wealth. It has also produced losers, and these have fallen for populist pied-pipers pushing protectionism. In an integrated and automated world, beggar-thy-neighbour parochialism will not be able to produce sustainable and inclusive growth; neither will deregulation and environmental degradation.[48] Alas, there is no rational discourse on the economic merits of the populists’ agenda: could it, even in theory, undo the technology-induced dislocations of jobless growth and social polarization? The answer is no.

The challenges for mainstream politicians and parties all over the world are daunting: jobless growth, social dislocation, corporate irresponsibility, ecological degradation, a fraying international order, immigration pressures and voter alienation, just for starters. The pile of issues is overwhelming and the political obstacles are awesome; the climate clock is ticking and, in an integrated, globalized world, national solutions are oxymoronic.

But globalization cannot be left to market forces. It must be managed. Economic policies have to be socially inclusive, ecologically sustainable and universal in scope. Nothing less than a global New Deal will do. It must put an end to social or environmental dumping and corporate tax avoidance; instead, it must be a comprehensive global blueprint of de-carbonization as well as of the improvement of all countries’ environmental, social and labor standards.

If this order were not tall enough already, there is the vertiginous population growth in sub-Saharan Africa that will, on the one hand, create more conflict, misery and migration pressures.[49] On the other, it will buoy chauvinistic forces in Europe, lead to detention camps on either side of the Mediterranean and heavily defended borders, none of which will address the real problems: inadequate health care as well as lacking opportunities for education - especially for girls - and for employment. The attractiveness of populist non-solutions is a symptom of a world in crisis, a crisis in Antonio Gramsci’s diagnosis of 1930 that “consists precisely in the fact that the old is dying and the new cannot be born; in this interregnum a great variety of morbid symptoms appear.”[50]

*Franz Baumann joined the UN Development Program in 1980 and began working in the UN Secretariat in 1985. He retired in 2015 as an assistant secretary-general, special adviser on environment and peace operations, after working about a dozen assignments under five secretaries-general, in four duty stations and on three continents.[IDN-InDepthNews – 08 March 2016]

The past quarter century was preceded by another strong quarter, which means that in the past half century the world economy grew six fold (cf. M. Ayhan Kose and Ezgi O. Ozturk, "A World of Change,” Finance & Development, September 2014, Vol. 51, No. 3); http://www.imf.org/external/pubs/ft/fandd/2014/09/kose.htm

[5] Between 1990 and 2013, the number of the global poor - who live on less than $1.90 per day - fell by half, namely from 35% (1.85 billion people) to 11% (767 million), a reduction of over 1 billion. World Bank. 2016. Poverty and Shared Prosperity 2016: Taking on Inequality. Washington, DC: World Bank. doi:10.1596/978-1-4648-0958-3. License: Creative Commons Attribution CC BY 3.0 IGO; Figure 0.3, page 5;https://openknowledge.worldbank.org/bitstream/handle/10986/25078/9781464809583.pdf

[48] Already in its first weeks in office, the Trump administration undid several key regulations concerning the US fossil fuel industry. Firstly repealed was the methane rule, the intent of which was to prevent the release and flaring of up to 180,000 tons of climate warming methane gas. Secondly reversed was the Stream Buffer Rule that protected 6,000 miles of streams and 52,000 acres of forests by preventing the cutting off of mountain tops in search for coal and dumping the resulting debris into adjacent valleys; nearly 2,000 miles of streams in Appalachia have been buried or degraded over the past twenty years. Thirdly repealed was a rule of the Securities and Exchange Commission that required oil and gas mining companies to disclose payments made to foreign governments for development rights, a measure intended to preclude bribes to foreign officials. See Eric Lipton, "G.O.P. Hurries to Slash Oil and Gas Rules, Ending Industries’ 8-Year Wait," The New York Times, Sunday, 5 February 2017; https://www.nytimes.com/2017/02/04/us/politics/republicans-oil-gas-regulations.html?_r=0 Chris Wood, “Save our Streams,” The New York Times, Friday, 10 February 2017; https://www.nytimes.com/2017/02/10/opinion/a-chance-for-trump-to-save-our-streams.html?_r=0

[49] Africa’s demographic trajectory is worrisome because an extremely high fertility rate will make most difficult, perhaps even impossible, the continent’s sustainable development. In 1950, the entire continent had about the same population as the four European countries France (42 million), Italy (47 million), the United Kingdom (51 million) and Germany (69 million). Until 2016, these four countries grew by 30 per cent to 270 million, Africa by 550 percent to 1,220 million. Africa’s population is projected to more than double by 2050 to 2,500 million people, and then almost double again by the end of the century to 4,400 million. http://worldpopulationreview.com/continents/africa-population/

In sub-Saharan Africa, half the population is under the age of 18. In 1990, there were about 94 million young people between 15 and 24 years of age, in 2015 190 million; by 2030 there will be 281 million. United Nations, Department of Economic and Social Affairs, Population Division, World Population Prospects, the 2015 Revision, https://esa.un.org/unpd/wpp/DataQuery/